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The Federal Reserve Bank of New York today released The
Timing and Funding of CHAPS Sterling Payments—a new forthcoming article in the Bank’s Economic
Policy Review series.

Authors Christopher Becher, Marco Galbiati and Merxe Tudela examine the availability
of intraday liquidity to participants in real-time gross settlement (RTGS)
systems, particularly CHAPS Sterling, and the factors influencing the timing
and funding of payments. They investigate the ability to use incoming
payments as a funding source, a process known as liquidity recycling.

Participants in RTGS systems face a trade-off between the cost of liquidity
(usually in the form of an overdraft fee or the opportunity cost of collateral
posted with the central bank) and the expected cost of delaying payments (usually
in the form of financial penalties or reputational risk). Liquidity recycling
may help to reduce the costs of intraday liquidity, although the authors note
that in CHAPS Sterling the extent to which individual banks benefit varies
considerably. The efficiency with which incoming funds are recycled
will depend on the extent to which participants collectively maintain the flow
of liquidity through the system, perhaps via proactive payment coordination.

Becher, Galbiati, and Tudela conclude that the degree of liquidity recycling
supporting CHAPS Sterling payments appears to be high yet stable throughout
the day, a condition they attribute to several features of the system. These
include centralized coordination devices such as the tendency to settle time-critical
payments early in the day, as enforced by a set of throughput guidelines. In
addition, the relatively small direct membership of CHAPS Sterling allows for
other forms of decentralized coordination between members. For example,
the high visibility of payment flows allows members to monitor their bilateral
positions and to take action if counterparties fail to make payments in a timely
fashion.

Christopher Becher, a policy officer at the European Commission, was an analyst
at the Bank of England at the time this article was written. Marco Galbiati
is an economist and Merxe Tudela a senior economist at the Bank of England.